President Barack Obama’s proposed tax break to encourage businesses to buy equipment may cost states $20 billion, adding pressure to governments struggling to close deficits, a report found.
Obama wants to allow companies through 2011 to deduct the full cost of capital investments in the year the expenses are made, rather than spreading write-offs across several years. That would hurt states whose tax codes model the federal government’s, said the Center on Budget and Policy Priorities, which advocates on behalf of poor and moderate-income Americans.
“This loss would come on top of states’ record revenue losses resulting from the recession,” the Washington research group wrote in a report today. “The additional state revenue losses resulting from the proposal would make it necessary for states to enact additional budget cuts or tax increases, which would reduce the proposal’s overall stimulative effect.”
States are likely to have $130 billion less than they need to pay their bills in the next budget year, which starts in July for most, the center said. While tax collections have stabilized, they have yet to rebound to pre-recession levels.
Obama’s proposal, which Congress would have to approve, is designed to stoke the economy by encouraging companies to spend some of the $1.85 trillion they had on hand at the end of the second quarter. The Treasury Department estimates the plan will accelerate $150 billion in tax breaks to 2 million businesses.
The White House didn’t immediately respond to a request for comment.
States Follow Suit
The proposal may cost states, which generally use the federal definition of taxable income when calculating how much individuals and corporations owe in local taxes, the center said. As a result, when the federal government allows deductions, state revenue drops as well.
Twenty-four states automatically change their definition of taxable income to conform to the federal government’s, according to the report. Another 22 update it every year to reflect federal changes.
“If the expensing proposal is enacted, economically significant corporations can be expected to bring considerable political pressure to bear on their state legislators and governors to conform state tax laws to the expanded federal deduction for equipment purchase,” the center wrote.
While about 85 percent of the state revenue loss would be recouped because the immediate write-offs would replace those of later years, it would present a strain through 2013, the center said.
New York faces the biggest loss, an estimated $3 billion, according to the center. New Jersey may lose $1.4 billion, with Illinois and Pennsylvania facing drops of $1.3 billion and $1.1 billion respectively, according to the center’s estimates. California, one of governments hardest hit by the recession, has its own depreciation rules and so is unlikely to be affected, the center said.
--With assistance from Kate Andersen Brower in Washington. Editors: Stephen Merelman, Mark Schoifet.
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